FxWirePro: Execute call ratio spreads in USD/JPY ahead of dollar’s speculation on Fed’s monetary season

From the nutshell showing delta risk reversal of ATM contracts and Net Present values of ATM instruments, it is understood that the ATM calls have been relatively on higher demand (this is just the resultant sentiments from recent rallies in this pair).

At the money calls seems comparatively costlier which divulges the market sentiments for USD/JPY pair.

NPV of 1w ATM call is 46032.85 while premiums trading above 20.33% at JPY 59391.83 for lot size 100,000 units. But if you have to observe the same from put contract side, premiums trading above 20.18%. Thereby, we conclude saying best opportunity to execute ratio spreads deploying call options.

It also reveals the hedging activity for downside risks cannot still be ruled out anticipating long term hedging sentiments are going in Yen's favor. Having said that the current dollar's strength is majorly coupled with a big event of Fed's monetary policy which is due in December.

As a result we come up with suitable hedging framework for slight downside risks. Place call ratio spread with 1:2 ratios. Current USDJPY FX spot is ticking at 123.297.

How to execute: Buy ATM 0.5 delta call with longer expiry (let's say 1m tenor). Sell two lots of 4D ITM strike calls (123.124). Thereby, we've formulated the strategy so as to suit the delta risk reversal to take the advantage of overpriced calls by shorting.

The delta value becomes more and more insensitive as the USD/JPY falls lower and lower and hence on the lower side, the delta value is zero.

Why call ratio spread: As the pair has made steep slumps and healthy recovery we see a neutral to bearish environment when you are projecting decreasing volatility (see from next 1 month to 3 month it's been gradually reducing).

Risk/Reward Profile: The risk is unlimited. The reward is the difference in the strike prices plus the net credit, multiplied by the number of long contracts.